March 2004 Newsletter

Health Savings Accounts

Last year, Congress passed The Medicare Prescription Drug, Improvement, and Modernization Act of 2003. This Act created a new benefit, the health savings account (HSA), which will be of interest to a variety of individuals. For anyone who was interested in a Medical Savings Account (MSA) when it came out some years ago, the HSA is an even more attractive alternative.

An HSA can help individuals pay current medical expenses and save for future medical costs, on a tax-favored basis. Contributions made to the HSA by an individual or their employer are tax-deductible. Similar to an IRA, amounts held in the accounts can be invested and the earnings are not taxed.

Amounts may be withdrawn by the individual from the HSA on a tax-free basis if used to pay for qualified medical expenses that are not covered by insurance or otherwise. Eligible expenses are quite extensive, and include: prescription drugs; alternative therapy such as acupuncture, Christian Science practitioners or osteopaths; dental treatment and eyeglasses; mental health practitioners; premiums for long term care insurance; and more.

The accounts are designed to be used in conjunction with a high deductible health insurance policy. These are defined as policies with an annual deductible of at least $1,000 for an individual or $2,000 for a family. These policies must also have a cap on the out-of-pocket expenses of $5,000 for individual and $10,000 for a family. For example, LifeWise Health Plan of Oregon offers a plan with a calendar year deductible of $2,500 for an individual and $4,000 for family, with maximum out of pocket of $3,300 individual/$6,050 family.

Once you have the high deductible health plan in place, you can set up an HSA and contribute the lesser of the annual deductible for such coverage, or $2,250 for individuals/$4,500 for families. (There are also catch-up amounts for account holders age 55 and over.)

The plans will be particularly attractive to individuals who are not high users of medical care each year. Any funds which are contributed to the HSA and not used can remain inside the account and continue to grow. Funds can be withdrawn and not used to pay qualified medical expenses, but will then be included in taxable income and subject to a 10% excise tax until age 65.

Employers may decide to switch to high deductible plans for their group insurance, because the cost savings in annual premiums can be significant — in some cases, over a 50% reduction in cost. Employers could choose to contribute some of the cost savings into HSAs for the employees, to help cover the higher deductible.

Individuals with HSAs may be more motivated to monitor and contain the cost of their medical care, since any unused amounts in the accounts are theirs to keep. Potentially, a well funded (and carefully invested) HSA could be the answer to how to pay for expensive prescriptions once retirees are on Medicare.

Although these plans are still relatively new, hundreds have already been put in place by Oregon employers. One HSA custodian offers a debit card and checks on your account, so it is very easy to pay for medical services. For the right demographics, these accounts can be very attractive.

Investment Boot Camp 2004

Due to popular demand, we are sticking with Saturday mornings for our boot camp workshops. Here are the dates set for 2004:

April 17, 2004 and June 5, 2004
9:30 a.m. to 11:30 a.m.

Call or e-mail if you or a friend wants to sign up for this program.


The purchase of Bidwell by Ameritrade has been approved, and the transition has started. We have been given a date of May 14 for when the official "hand off" will occur.

Ameritrade is based in Omaha, Nebraska, and has a 28 year history of serving self-directed investors and is a leader in the online brokerage business. They currently serve over 3 million clients and 750 investment advisors. Their commissions and fees are very competitive and in most cases will be lower than Bidwell's.

We have been told that Ameritrade will maintain a local office for advisory clients (but not for retail business) which will be headed by former Bidwell employee Barry Nicholson. They have also indicated they plan to keep "the look" of the Bidwell statements even after the transition, which we were happy to hear.

The May transition may require that clients with check writing on their accounts get a new checkbook linked to Ameritrade. You will continue to have web access to your accounts and receive monthly statements.

Silver Oak will monitor the transition and the level of service provided by Ameritrade to evaluate whether our clients are best served by keeping accounts there or moving to another custodian.

Don't forget to make your IRA contributions for 2003 before April 15, 2004, if you haven't already. Why not avoid the rush and make your 2004 contribution at the same time?

Investor Behavior

A paper recently published by the Yale International Center for Finance entitled "Investor Behavior Over the Rise and Fall of Nasdaq" concluded that institutional investors contributed more than individuals to the Nasdaq rise and fall from 9-1-99 through 12-31-01.

The traditional "rational markets" view holds that individuals may trade irrationally, but such trading doesn't substantially affect prices because sophisticated traders (institutions) quickly trade against these agents to eliminate deviations from "true" economic values. But this research found support for the alternate view that "professional investors...are not immune from the effects of the popular investing culture that we observe in individual investors." (Shiller, 2000).

During the dramatic market run-up from March 1999 to March 2000, institutions generally increased their positions in Nasdaq securities (holding over 50 percent of Nasdaq market capitalization), and were responsible for more trading volume than individuals in the six-month period prior to the peak in March 2000. Overall, they found that "institutional traders (or smart money) do not attempt to trade against market movements, but rather actively participate in both the run-up and run-down of Nasdaq 100 prices."

Just another bit of data to support The Terrible Truth About Investing: it's very difficult!

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